How big banks should counter law of diminishing IT returns

by CXOtoday Staff    Apr 12, 2013

Big Banks

Big banks may be considered too big to fail, but their size and operational complexity create performance drags that could also make them too big to succeed. As a result it is necessary that bank CIOs and COOs must innovate in IT and operations to negate a problem Gartner has identified as the “law of diminishing IT returns.”

Exponential increases in demand for IT are a problem for all banks, particularly because IT budgets have failed to keep pace with demand. Big banks’ internal economies of scale — which make them better able to absorb fixed overheads due to a larger customer base and stronger buying power — should give them an advantage over smaller banks.

CIOs and COOs should address the impact of the law of diminishing IT returns in executive management steering committee meetings. The focus should be on improving process simplification, standardization, application portfolio rationalization, data quality, openness and divestment.
-Peter Redshaw, Managing VP, Gartner

Gartner has identified the following  three key impacts on big banks and associated recommendations:

1. The increasing size and complexity of big banks is outstripping the ability of their CIOs to provide effective IT and operational support.

IT is more important to the intricately interconnected global economy than ever before. Everyone involved in business — from senior management to lower-level employees to customers and clients to business partners — expects to use new technologies for business purposes. The phenomena of rapidly escalating demand, limited IT scalability and diminishing returns on IT investments are especially prominent in heavily digitized industries such as banking and insurance. Their products are fundamentally intangible, and IT plays a primary role in virtually every aspect of operations.2. Increasing digitalization has created exponential growth in demand that exceeds the bank CIO’s ability to supply IT cost-effectively.

CIOs and COOs are well aware of the extraordinary and constantly increasing demand for IT services. One of the most striking examples is the pervasive use of consumer-owned devices for business purposes. This is forcing enterprises worldwide to introduce bring your own device (BYOD) policies. The surge in IT demand, however, does not stop with BYOD. IT is now expected to support cloud-based applications, employee use of social media, connectivity with external business partners, and many other new demand-driven IT use cases, many of which are effectively beyond the control of the enterprise’s IT and operations organizations.3. IT spending outside the bank CIO’s control renders traditional management models obsolete.

Business units, from sales and marketing to manufacturing and logistics, now routinely make their own purchasing decisions about infrastructure, systems and applications. IT and operations must eventually implement and manage all IT assets and processes, but these costs are rarely taken into account in the evaluation, selection and purchasing process. Moreover, these costs will certainly increase due to the fragmentation of technologies and run-cost support mechanisms, such as security, data management and version control.